The stock market has continued to pull back for the past two weeks after a strong bounce from the November lows. The past two weeks have been very difficult to trade with little follow through to either side. Overall, the pattern of a consolidation from the October highs remains intact, although most of the indexes are vulnerable to further selling as it stands.

This pattern is quite evident when looking at the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF. Overall, it's easy to see how SPY has been drifting back since October, although the past four weeks have seen some violent moves. Most of the selling has occurred in the vicinity of the 200-day moving average, which currently stands near $126. SPY basically pulled back the past two weeks to fill an open gap in the $122 area, but is holding below the 50-day moving average in the process. SPY is in a pivotal area here, as further downside would likely imply a test or breakdown through the November lows. However, a bounce from these levels may signify a higher low and a likely breakout above the current pattern. (For more, see Moving Averages: Introduction.)

The DJ Industrial Average, as represented by the Diamonds Trust, Series 1 (NYSE:DIA) ETF, is following a similar pattern. There are a few differences, such as DIA holding above its open gap and 50-day moving average, but much of it can be attributed to the fact that the index only follows 30 stocks and may be influenced by a couple of standout stocks like McDonald's Corporation (NYSE:MCD). DIA is currently sitting right on its 20, 50 and 200-day moving averages, which could be a positive, except DIA has been under constant pressure for the past two weeks. DIA could come back to fill the open gap near $116, although any lower and DIA could threaten to become unraveled.

The Nasdaq 100, as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF, continued to perform poorly and closed underneath all its key moving averages. QQQ is quite vulnerable where it stands, with the November lows right in its sights. Apple, Inc. (Nasdaq:AAPL) has been acting poorly, which is certainly weighing the index down. QQQ is oversold, which may work in the bulls favor, but as it stands, this average looks like it may be headed lower.

The small caps as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF closed right on its 20 and 50-day moving averages. It held fared a little better than SPY and QQQ by closing well off the prior gap and near its key averages. This is one group that could take a leadership role into the new year, so its relative strength should be payed attention too regardless of how minor in magnitude. It's possible that IWM will drift back towards $70, but its critical that IWM hold up in this area and form a higher lows. Any sustained weakness under this weeks lows would imply a trip back down under the November lows.

The Bottom Line
The bottom line is that the markets remain quite vulnerable despite the fact they could be close to setting higher lows above the November pivot lows. One factor that may work in the markets favor is that the indexes are starting to get oversold after two weeks of selling. We have been expecting strength towards the end of the year, but the markets have not been making it easy. The indexes remain vulnerable in their current positions and much will be decided in the next week. If the markets dip under their November lows, it could lead to much lower prices. However, any bounce from these levels could catch short sellers off guard and lead to a break above the current consolidation. (For more, see Technical Analysis: Introduction.)

Charts courtesy of stockcharts.com

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  4. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  7. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  10. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Indicator

    Indicators are statistics used to measure current conditions ...
  5. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!